Differences between Managerial and Financial Accounting - Essay Example

? Compare and Contrasting Financial and Managerial Accounting Memo 11th January, Sally Jones An Overview of theMemo Management or managerial accounting which is also referred to as cost accounting refers to the internally prepared information that is found through financial accounting and used within the firm in making very important decisions. Cost accounting is applied in organization, regulation and making of decisions. Accountants specialized in managerial accounting depend on the regular statements of finance such as income statement, cash flow statement and balance sheet and other kinds of accounting reports in evaluating the firm’s information. This memo outlines the differences between managerial accounting and financial accounting and the Managerial Reports and Usefulness in Decision Making. The reports presented in this memo comprise of product cost reports, budget reports, performance report, order information report and the business opportunity report. Differences between Managerial and Financial Accounting Given the fact that one of the duties of a manager is to plan; then it stipulates that management accounting has a solid emphasis on the future. On the other hand, financial accounting fundamentally gives summaries of the previous financial transactions. The summaries might be very important in the planning process, but only to a particular point. In this perspective, the future might not be a replication of the transactions that took place previously. Modifications are regularly taking place in the fiscal conditions thus the modifications call for planning which is based to a large extent on estimates of the transactions that will take place as opposed to the summaries of the transactions that have already taken place (Needles, Powers & Crosson, 2010). Financial accounting information is always anticipated to b verifiable and objective. Nonetheless, for internal purpose the manager demands data that is significant even if it is not totally verifiable or objective. By virtue of relevance, it implies that appropriate for the challenge at hand. For instance, it is hard to ascertain that estimated volume of sales for a proposed expansion of business into the foreign country but this is precisely the kind of data that is prevalently useful to managers in the process of decision making. On the other hand management accounting information system must be adequately elastic to give any kind of information that is appropriate for any specific decision (Teale, 2003). Managerial Reports and Usefulness in Decision Making There are various managerial reports which are used in making important decisions in business. Such reports comprise of cost reports, Performance reports, budget reports, business opportunity reports and order reports. These types of reports have various uses in decision making process. Cost Reports Management accounting makes calculations of the cost of goods and services being produced. This is possible through accumulation of costs of raw products, costs of overheads, labor costs and any other extra costs that might be put into consideration. The entire costs are then divided by the quantity of the products produced where the information is put into a cost report. Cost reports are significant methods for firms to adapt or learn which areas of a business are potentially profitable and areas that costs more money. When cost reports are made prior to the beginning of a project, they give an efficient estimate of the likely cost of a project thus allowing the manager to plan and estimate the profit margin. Whenever the cost reports are made after the project has been finalized one can get a better insight of the maximum costs and the profit expected from the project. Use of the Report This type of report gives the managers the ability to see the constituent cost prices of products against the selling prices thus enabling them to determine the profit margin. Efficient cost reports gives quality information to enable managers see the significance of financial defects. Normally the managers are not usually conscious of the quantity of the quality costs due to the costs cuts over the departmental lines thus not often tracked and accumulated by the system of costing. In addition, the cost report enables the management to recognize the relative significance of the quality challenges faced by the company. For instance, they might reveal that scrap is a fundamental quality challenge which makes the firm incurs very huge unnecessary costs hence managers are likely to use this to step up their efforts. Lastly the cost report enables the management to perceive whether their quality costs are not well distributed. In common, the quality costs are spread more towards aversion and appraisal transactions and less towards downfalls. Budget reports One major aspect of management accounting is the creation of budget. Budgets are fundamentally established by making use of the prior fiscal year’s budgets and modifying to future estimates. A firm’s budget makes lists of all sources of expenses and revenues. A firm makes efforts to fulfill its goals and targets while remaining within the budget figures. Managers normally look into fresh vendors to use as distributors of raw materials to save some money. They also seek ways to improve on the sales level while minimizing on the expenses. Use of the Report The budget report is applied by the managers in identifying the expenses or sales whose figures are not what were actually anticipated so managers can look for ways of knowing why the deviations took place. By comprehending the variances normally positive figures and unfavorable figures are normally negative figures. Budget reports are also useful tools for determining effectiveness of managers only in cases where they have relevant facts. When making budget reports, it is vital to put in the report the items the managers are in a position to control. In case a manager is accountable for the costs of a department, to include costs of manufacturing or net income for the firm would not lead into a just presentation and assessment of the performance of the managers. In case nonetheless, the manager happens to be the chief executive officer, the whole statement of income must be used in assessing the performance (Bhattacharyya, 2011). Performance Reports Management accountants make use of the budget to make comparison of actual revenues and expenditure to the determined amount. The variations determined are evaluated when making new budgets and all the facts in regard to these figures is placed on the performance report. Performance reports are done annually, nonetheless, some firms make them quarterly or monthly basis. Use of the Report The reports are very useful in various ways; these reports enable management to plan for the future demand in the process of production on top of cost increases in costs. Besides, the performance reports are useful in the process of planning and controlling the manufacturing operations. Order Information Reports Order information reports are also prepared by the managerial accountants. They are useful in comparing the orders placed to the orders acquired or received. These kinds of reports show backlog information and in case the orders placed were quite sufficient. Use of the report The reports are important in that they make summaries in case too many orders of particular goods were placed, thus making the firm to stay with products which are not needed at the time of placing the orders. Business situation or opportunity report Business situation or opportunity reports are prepared to present to the company the available opportunities from the business operations. The opportunities might be within the business or outside the business given the strength and potentials of the firm. Use of the report Business situation or opportunity reports are established to help the management to make efficient decisions concerning the existing and future business circumstances. Conclusion In conclusion, management accounting and financial accounting are significant in the process of making important decisions in the firm. As discussed above management accounting gives an estimate of the future performance and emphasis on the future performance. Notably from the discussion, it is important to note that the different types of reports presented are significant in process of decision making and evaluation of the company’s performance. The management has a duty to make relevant reports that are in line with the operations to create efficient avenues for better performance appraisal and evaluation. References Bhattacharyya, D. (2011). Management accounting. Delhi: Pearson. Needles, B. E., Powers, M., & Crosson, S. V. (2010). Financial and managerial accounting. Mason, OH: South-Western Cengage Learning. Teale, M. (2003). Management decision making: Towards an integrated approach. Harlow, Essex: Pearson. Read More